Under strong pressure from the commodity trading industry, the House Ways and Means Committee voted yesterday to limit most future use of commodity tax straddles, but agreed to an industry-backed plan that would exempt commodity traders from the new rules.
The committee voted 25-8 for a proposal by Rep. Martin A. Russo (D-Ill.) with the aid of "advisers" from the Chicago Mercantile Exchange and the Chicago Board of Trade, the nation's two largest commodity markets.
Russo's plan generally would prevent wealthy individuals from using commodity tax straddles to reduce or eliminate federal taxes on income from other sources outside of commodity trading such as salary, investment earnings or the sale of property.
But those commodity traders whose principle business and income comes from trading commodity futures contracts would be allowed to continue the use of straddles under Russo's plan. Commodity futures traders are also permitted to take tax deductions on the interest and carrying charges from commodity-related gains.
"If we're expecting doctors, dentists, lawyers and rock stars of America to live with it, why shouldn't the trader?" complained Rep. William M. Brodhead (D-Mich.), who proposed the stricter measure backed by the Reagan administration and adopted by the Finance Committee, but rejected by Ways and Means yesterday.
Brodhead's amendment would have recovered $1.3 billion in tax-sheltered income from wealthy straddle-users. Russo's plan recovers just under $900 million, after exempting commodity traders, according to Joint Tax Committee estimates.
Commodity straddles are complex transactions in which an investor enters into simultaneous contracts to buy and sell a commodity such as silver, soybeans or Treasury bills on specified future dates. Depending on what happens to the commodity price, the investor could have an identical profit and loss from the two transactions. High-income individuals use the procedure to et valuable tax savings by taking a tax deduction on the loss from the straddle operation in December, for instance, and collecting the profit later in the next year, when it could be taxed at a lower rate as a long-term capital gain.
Restricting use of straddles by traders would interfere with the smooth functioning of the commodity markets, making the public more vulnerable to sharp swings in commodity prices, Russo said -- an argument that the Treasury Department disputes.
Russo said his proposal was drafted Thursday evening by the Joint Tax Committee staff following a meeting with the staff attended by himself, Brodhead and his "advisers" -- Leslie Rosenthal, chairman of the Chicago Board of Trade, and Leo Melamed, special counsel to the Board of Governors of the Chicago Mercantile Exchange.
It would be "very unfair" to say that Rosenthal and Melamed drafted the measure, Russo said yesterday after the committee meeting. But they had plenty of contributions, he added. "I have worked very closely with them on this issue. They are two of the most knowledgable people on that particularly subject." Although the two commodity industry leaders still have some reservations about the Russo plan, they are "very pleased with the way it came out," said Russo.
Campaign financing records show that Russo received a $1,200 contribution last year from the political action committee of the Board of Trade and $550 from the Mercantile Exchange political committee.
Ways and Means Chairman Rep. Dan J. rostenkowski (D-Ill.), who voted for the Russo measure, recieved $3,000 from the Chicago Board of Trade political committee and $5,000 from the Mercantile Exchange political committee.
Several Ways and Means Committee members said the straddle issue was simply too confusing for them to take final action yesterday. Rep. Barber B. Conable Jr. (R-N.Y.), the top-ranking committee Republican, said that if the committee had adopted the Senate version by passing Brodhead's amendment, the issue would have been closed. Conable said he needs more time to study it.
So does Rep. Sam Gibbons (D-Fla.). "Like other members of the committee, I'm not really capable of making a final decision on this," Gibbons said.
In another development in the tax debate, a group of Democratic senators said they will try to attach a "safety valve" to the third year of the Reagan tax plan when the Senate takes up tax legislation next week. The proposal by Sen. Bill Bradley (D-N.J.), backed by the Senate Democratic leadership, would prevent the 10 percent third-year tax cut from taking effect unless the economy has achieved the targets set by the administration for the end of 1982.